This is a CU Colorado Springs student blog for the following courses: Intermediate Microeconomics and Austrian Economics.

October 20, 2014

Government Intervention

"Raising the minimum wage would equally help Americans who live in Republican and Democratic districts, rural and metropolitan. It would also pump money into the economy and save billions in taxpayer dollars by reducing the number of low-wage workers receiving federal assistance. It seems an obvious thing to do." - Raymond C. Offenheiser from Why raise minimum wage?

Ludwig Von Mises would disagree with this statement because he believes that societies need government to protect life, liberty, and property and anything it does beyond this is a violation of its boundaries. When the government intervenes in matters such as the market, specifically the wages of workers in this case, it creates unintended consequences since it put its hands on an issue that it was never intended to solve.

According to Mr. Offenheiser, here is what would happen if the minimum wage were raised:

Stimulation of the economy: since workers would have more money in their pockets, they would turn around and spend it, sending more money through the economy

Less dependence on social programs: since workers would have more money, they would slowly rely less and less on the government

More jobs: the workers would spend more which would result in businesses earning more money and would therefore be able to hire more people

Equal distribution of wealth

According to Mises, if the government sets a price floor on minimum wage, it results in unintended consequences because, though the idea that consumers will spend their extra money is nice, it is not always the case. When a poor person receives a higher paycheck, is their first instinct to go and spend that money? Or to save it? It depends on the individual of course but applying logic to this scenario, Mises recognizes the very real possibility that when people who have been living on a very tight income begin earning more income, their tendency is to save that money. Unless the increase is a profound amount, such as half a million dollars or the lottery, people lean towards saving their money. Unfortunately, the minimum wage cannot be increased to half a million dollars. An increase in the minimum wage would not stimulate the economy because realistically, people save extra income.
In response to the assertion that a higher minimum wage would reduce dependency on government programs Mises argues that an increase in itself is a reliance on the government. People waiting for the government to give them higher paychecks is clearly dependence on the government, simply in another form.
Mises argues that an increase in minimum wage would not result in an influx of jobs. He believes that markets are self-correcting, if untouched by excessive government involvement, and that government intervention in this case would result in the opposite of the expected outcome. Raising the minimum wage and hoping that the workers spend the extra $3 per hour instantly to support the economy is unrealistic. Even if it were the case, businesses also tend to save so if they experienced higher profits, the first move would most likely not be to hire a bunch of new employees. It would be something more along the lines of investing, improving advancements and technologies, or saving. Raising the minimum wage would mean that businesses would have to let people go. It is the same scenario as when a business cannot sell a product because it costs them too much. Do they keep that product or do they trash it? With labor, the same concept applies. If it costs more to keep that labor that isn't producing more output for that raised cost, they will be let go.
Lastly, Mises disagrees with the assertion that a raise in minimum wage will level out income inequality because he realizes that in a capitalistic market system, the rich are rich because they invested time, money, energy, and hard work into an innovation that the masses benefit from. The poor are poor because they have not made such investments, or if they have, it was not as big of an investment. If everyone got paid the same amount, innovation would go extinct. Why would the inventor of the iPhone go through all the tedious, difficult, tumultuous travails that come with creating a cell phone if his income matched that of the cashier at 7/11? It is much easier to punch a few buttons and put money in a drawer, so if everyone got paid the same, everyone would do the same amount of work. Mises says that the government sticking its hands into this aspect of the market will not level out the income "inequality." It will result in more people not having an income at all.
In all of these examples, the government actually creates a new problem without solving the original one. This is Mises' view towards government intervention: although it sounds nice, it never satisfies.

1 comment:

I wonder if it is "a given" that people with little money, upon receiving a higher wage, will tend to save it... Perhaps this was once true of Americans, but it doesn't seem to be the case anymore. Since 1969 personal savings in the U.S. has gone up and down quite a bit. However, overall, the trend has been a downward one. For example, in the mid 70's U.S. personal savings (as an average) peaked at 14.6% of income only to dwindle down as low as .8% in the years preceding the 2008 financial crisis. Since then it has gone up less than five pints and is currently at 5.4%... But still, it would be hard to argue that Americans still behave the way they did during Mises' time when he made this observation. This isn't to say the rest of Mises' criticisms don't hold any water as far as government intervention and minimum wage- i just wanted to point out that there is no hard and fixed rule concerning a population's general attitude towards savings. Even when examining the same population- over several decades, there can be wide swings in preferences and behaviors that should be taken into account.